This is the second Micron Cash-Secured Puts position established with a June 19th expiration date, the primary difference being that the first one was at the $40.00 strike price (details of this prior position at this link). The cash to establish this new position was available from the Covered Calls Advisor's Covered Calls position in Applied Materials that was assigned at options expiration last Friday.
The Implied Volatility of the Put options was 52.0 when this new Micron position was established; so the $279.99 ($.94 per share x 300 shares - $2.01 commission) is a nice premium to receive for these out-of-the-money (i.e. strike price below the current stock price) Put options. Importantly, there is no earnings report prior to the June 19th options expiration date, Micron's next quarterly earnings report now scheduled for June 29th.
Micron is very highly rated by analysts. Reuters Research indicates that currently 27 analysts have a Buy or Outperform rating, 7 have a Hold, and 1 has a Strong Sell, and their average target price is $62. Also, although the Covered Calls Advisor depends primarily on fundamental value factors in deciding what stocks to purchase, a minor consideration is given to technical factors. In that regard, the 2-day relative strength index [i.e. RSI(2)] for Micron moved into short-term oversold territory this morning at 26.7 (note: below 30 is normally considered as oversold and above 70 is considered overbought) when this position was established. This compares with a close-to-average of 49.5 for Micron's RSI(14) level and a RSI(14) of 59 for the semiconductor industry (as indicated by SMH).
As detailed below, for this new Micron position there is potential for a +2.2% absolute return in 18 days (equivalent to a +45.0% annualized return-on-investment).
MICRON TECHNOLOGY INC. (MU) -- New 100% Cash-Secured Puts Position (2nd position in Micron with a June 19th options expiration date)
06/02/2020 Sold 3 MU June 19th, 2020 $43.00 100% Cash-Secured Put options @ $.94 per share.
Note: there was a very high Open Interest of 12,329 contracts in this option, so the price spread between the Bid and Ask prices was advantageous at only $.02 per share.
The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the three Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $12,620.01
= ($43.00 - $.94) *300 shares + $2.01 commission
Net Profit:
(a) Options Income: +$279.99
= ($.94 *300 shares) - $2.01 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron Technology Inc. is above $43.00 strike price at the June 19th expiration): +$0.00
= ($43.00 - $43.00) *300 shares
Total Net Profit (If Micron stock price is above $43.00 strike price at options expiration): +$279.99
= (+$279.99 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If Micron stock price is above $43.00 strike price at June 19th options expiration) : +2.2%
= +$279.99/$12,620.01
Annualized Return: +45.0%
= (+$279.99/$12,620.01)*(365/18 days)
The downside 'breakeven price' at expiration is at $42.06 ($43.00 - $.94), which is 8.2% below the current market price of $45.82.
The probability of making a profit (if held until the June 19th, 2020 options expiration) for this Micron Technology Inc. short Puts position was 73.1% when this position was established. Using this probability of profit, the expected value annualized return-on-investment (if held until expiration) is +32.9% (+45.0% * 73.1%), an attractive risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $46.76 ($45.82 + $.94). This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until the June 19th, 2020 options expiration date rather than selling these Put options.
